Blacking Out on Financial Reform (Corrected)

2,260,361: that’s the number of labor hours one regulator conservatively estimates that financial institutions will spend implementing the regulations spawned by Dodd-Frank. The estimate came from Richard W. Fisher, the President of the Federal Reserve Bank of Dallas in a speech he gave on January 14th calling for fundamental banking reform. He pointed out that even after Dodd-Frank, there are 12 institutions that presently account for 69% of total industry assets and that they are too big to fail because of the threat they pose to the financial system and the economy should even one of them get into trouble. By contrast, as credit unions know all too well, the vast majority of financial institutions are subject to financial discipline. If they mess up, they go out of business.

Fisher proposed setting up a true firewall between the legitimately guaranteed insured deposits of commercial banking and those activities of investment bankers which should never be given any type of government insurance. So, for instance, banks but not bank holding companies could get access to the Federal Reserve’s discount window in the event of an emergency. In addition, every customer, creditor and counter party of investment banks other than traditional commercial bankers would have to sign a covenant before entering into a financial transaction stipulating that dealing with this affiliate carries no federal deposit insurance or other federal government guarantee.

Proposals like this have been floated before. What’s different now is that they may be reflecting both a political and policy consensus that more needs to be done. This morning, Britain’s Chancellor of the Exchequer, George Osborne, endorsed the idea of reinstituting barriers between a single company being able to engage in both investment and commercial banking, even suggesting that investment banks and commercial banks should have separate chief executive officers.

So why should credit unions care about all of this? First, if we’re going to have to live with the consequences of banker malfeasance, we might as well make sure that nothing like this happens again in the near future. Politically, this is an issue that has appeal to both the right and the left and credit unions could both strengthen their brand and their political strength by pointing out the strengths of traditional banking.

Second, we’re in a unique position to both understand the importance of a strong financial system and to explain to people the need to guard against the black swans that will appear in the future. There is no more scripted sporting event in the world than the Superbowl, but it took 31 minutes for to get the lights back on following a power outage during last night’s game. After the power outage, the game fundamentally changed before the Ravens held on to win. Regulators are great at addressing the last crisis, but it is always going to be the institutions that are best prepared to deal with the unexpected that are going to make it through the next one. Congress and regulators have fundamentally changed mortgage practices, but the next crisis will probably have nothing to do with mortgages and unless we have a system that can impose market discipline on those institutions that are responsible for mishaps, we’re going to be a lot like the Baltimore Ravens struggling to hold on.

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